Diversification is one of the main principles of investment, and loans are just another type of investment. Having a diverse loan portfolio protects you and aids in reaching a long-range of financial goals while minimizing risk. One of the main reasons why people are looking to diversify their loan portfolio is that this reduces the risk a single borrower can pose over your entire investment.
How and why would one diversify?
The primary requirement for your loan portfolio to be diversified is that you have not placed all your money into a single loan. It is essential that you divide your capital among several different loans, even if they are for smaller sums – this will allow you to lower the risk, as even if one of your borrowers defaults, you will have several others who will keep bringing you profit.
The overall goal when diversifying your loans is to make your returns flow in smoothly, and in order to disperse the risk, it is highly advisable that you lend out to different borrowers, be it personal loans or business loans. Having a loan portfolio consisting of different asset classes is the optimal way to diversify.
Recent years have been fruitful for SMEs in the ASEAN region. Investors from the US have been working hard to give the emerging businesses a push, as has Derrick Stevenson, an investor that set his mark on lending out to SME owners in the textile sector. He decided to go with seven small businesses, eventually adding seven new entries to his portfolio. Unfortunately, due to very unfavorable weather conditions which persisted for several seasons, all seven companies went bankrupt, resulting in a massive loss for Derrick.
Derrick’s story emphasizes the fact that he, as a lender, should’ve diversified his loan portfolio with maximum differences in the fields, companies, and industries.
To avoid losing all your capital, you should remember not to place all of your eggs in the same basket. It ensures that even if one or two of your borrowers are unable to repay, you will still be receiving returns on the other entries in your loan portfolio.
How does AssetStream promote diversification?
AssetStream, a decentralized peer-to-peer lending and microfinancing platform, realizes the importance of loan diversification, which is why they offer lenders the opportunity to achieve a “Diversified Investments” badge on their profile.
To promote diversification and to push lenders to achieve the “Diversified Investments” badge, AssetStream has made sure to offer a wide range of lending opportunities and business types.
The “Diversified Investments” badge is meant to be a lender’s insurance that they have done everything possible to minimize the risk on their loans. In other words, this ranking will show that a lender has numerous active contracts with different borrowers.
The best thing about the AssetStream platform is that it allows lenders to choose between personal loans and business loans to add to their loan portfolio. This flexibility comes especially handy when a lender is trying to diversify their loan portfolio.
Wondering if you really have to diversify?
Diversification is always recommended because it mitigates a large percentage of the risks involved with giving out loans. AssetStream is a quality financial service, which is why it gives you the opportunity to diversify, and you should absolutely take advantage of that.
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